Atlas Air Worldwide Holdings Inc (AAWW) 2012 Q2 法說會逐字稿

Good morning, my name is Alice, and I will be your conference operator today. At this time, I would like to welcome everyone to the second-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn today's earnings call over to Atlas Air Worldwide Holdings. You may begin.

Thank you, Alice, and good morning, everyone. I am Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our second-quarter 2012 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Senior Vice President and Chief Financial Officer. As a reminder, today's call is complemented by a slide presentation that accompanies Bill and Spencer's remarks. If you have not already downloaded a copy of our Press Release and slides, you may do so from our website at www.atlasair.com. You may find the slides by clicking on the link to presentations in the investor information section of the website.

As indicated on slide 2 we would like to remind you that our discussion about the Company's performance today includes Forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations, and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any Forward-looking statements. For information about risk factors related to our business, please refer to our 2011 Form 10-K as amended or supplemented by our subsequently-filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights, and are reconciled with GAAP in today's Press Release, and in the appendix that is attached to today's slide presentation. You can also find these on our website at www.atlasair.com.

During a question-and-answer period today, we would like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After we have gone through the queue, we will be happy to answer any additional questions that you may have, as time permits. At this point, I would like to turn the call over to Bill Flynn.

Thank you Ed, and good morning, everyone. We are pleased to have you join us today. We continue to expect 2012 to be a year of the good earnings growth. As slide 3 indicates, we have built a strong and resilient business model, and we are executing on our strategic growth plan. While our outlook is tempered by macro economic uncertainty and impact that may have on air freight demand, we are reaffirming our guidance to deliver both recorded and adjusted earnings per share of more than $5.10 this year. That's an increase of 24% from our adjusted EPS in 2011, and it's on a 17% increase in block hours, demonstrating our operating leverage.

Several key growth drivers will propel our business in 2012 and beyond. It begins with our new 747-8 freighter. Our first five wide-body Dash 8s have entered service, and we're looking forward to taking delivery of an additional two by the end of this year, and two more in the first half of 2013. These aircraft are dropping volumes and profitability for our customers, and in our core ACMI business. Also in ACMI, our recent placements of 747-400 cargo aircraft with Etihad Airways in June, and DHL Express in July, demonstrates the continuing value provided by the 400 aircraft type and our market-leading services. We have 20 aircraft in ACMI service currently, and expect to have 23 in ACMI at the end of the year.

Complementing the strength of our ACMI business, our asset-light CMI business is continuing to ramp up as we fly more Dreamlifter hours for Boeing, driven by increased production of its 787. And, as we add more aircraft, and perform more CMI flying for DHL Express. Building on our versatility, we created a military passenger operation that is benefiting from our substantial increase in passenger 747 and 767 flying. Both internationally and within the United States, where the military also has substantial demand. Expanding our passenger capabilities, we are bringing the same level of service and expertise to the commercial charter passenger market. And we will benefit from increasing fluid efficiencies in our 767 operations, as we expand to a total of 8 aircraft throughout this year. As we have noted, we have a track record of executing on our strategic growth plan. Given our scale efficiencies and operating flexibility, our unparalleled modern, diversified fleet, our resilient business, and the investments that we have made, we can perform well in any environment.

Slide 4 highlights our second-quarter results. For the fourth quarter, we delivered adjusted net income of $31 million, and adjusted diluted EPS of $1.18. Earnings in the second quarter were driven by an increase in contributions from the investments we've made to diversify and grow our earnings streams, and the scale and efficiencies inherent in our operation. Our 747-8 supported volumes and profitability in ACMI. We saw strong growth in our military passenger service. And our commercial charter operations benefited from our flexibility in responding to market demand. Our adjusted results for the quarter exclude the impact of incremental costs related to the retirement of our 747-200 fleet, which totaled $0.04 per share. That was partially offset by gain in $0.03 per share on the disposal of retired 747-200 airframes and engines.

As anticipated, volumes and rates in the commercial air freight market in the second quarter moderated from stronger levels that we saw in March. Reflecting slower overall demand during the quarter, particularly on trade lanes such as Asia to Europe, several leading scheduled cargo carriers reduced their frequencies, which helped stabilize yield. It is also important to note that other commercial effort market and trade lanes continue to grow during the second quarter, and we were well-positioned to help our ACMI and commercial charter customers respond to increases in demand for air freight capacity. In the high-tech sector from Asia to Europe, and in the automotive sector from Europe to the US, and South America. This drove higher than minimum utilization in ACMI during the quarter. While commercial charter demand from Asia into the Middle East and Africa remained solid during the second quarter.

Slide 5 highlights a number of achievements so far in 2012 as we drive growth in our business platform. With our expansion into 767 aircraft, we placed our third passenger 767 in service in May. Or 767s provide additional flexibility in our fleet, enabling us to better serve the needs of the US military and to diversify the outsourced services that we offer our commercial customers. Combined with our 747-400 passenger aircraft, we generated approximately $69 million in military passenger revenue in the second quarter, compared with approximately $6 million in the second quarter last year, when we launched our military passenger business. And that flying is not just internationally to and from conflict zones. It also includes a significant amount of normal troop rotations in training exercises within the United States and elsewhere. Even in a post-conflict environment, we expect AMC operations will remain an important part of our business mix.

We took delivery of our fourth and fifth 747-8s and place them into ACMI service for Panalpina. With 2 Dash 8s, Panalpina can take further advantage of the aircraft's increased capacity, revenue-generating capability, and improved fuel efficiency to offer its customers a unique and highly-flexible solution for time-definite air freight. In June we began applying for Etihad Airways. Our aircraft is the first 747-400 freighter in Etihad's global network, and it links the high-growth Asia, Africa, Europe and other global trade lanes with Etihad's hub in Abu Dhabi. Reflecting on our focus on customer growth, and the continuing attractiveness of the factory built 747-400 freighters, we began flying a ninth 400 for DHL Express in July. Also in July, we broadened our CMI server solution, and further expanded our long-term relationship with DHL Express, placing a fourth 767 cargo aircraft into service for DHL in North America. That new service will operate 5 767 freighters owned by DHL, with a fifth aircraft expected to be operational in October of this year. Our 3 767 passenger aircraft and our 4 passenger 747-400s are also available for commercial charters, enhancing the utilization of these aircraft and the returns that they provide.

Demonstrating the quality and reliability of our service, we recently flew the Manchester United soccer team on a global exhibition tour for matches in South Africa and China. And that follows a number of high-profile VIP missions that we shared with you previously. With the delivery of our latest Dash 8 last week, we have now completed two Ex-Im financings on these aircraft, locking in very attractive coupon rate of 2.02% and 1.73% on this 12-year debt. As we noted at our Analyst Day in early June, we have reached an agreement with Boeing to resolve contractual issues and disputes that we have on the 747-8 platform. The terms of the prior agreement are confidential, but we are satisfied with them. We have had a long and mutually rewarding relationship with Boeing, and we look forward to continuing that in coming years. Lastly, our business begins with the customer, and the superior service we deliver for them. And that reflects the consistently high ratings in our cargo and passenger operations achieve on periodic audits by IOSA and the Department of Defense.

Turning to slide 6, we are looking ahead to an improvement in our business in the second half of the year. We anticipate the demand from the high-tech sector will increase, as multiple new product launches take place during the final four months of the year. This should have a positive effect on volumes and yields in our trade lines, where our ACMI customers and our commercial charter aircraft operate. South America, the Middle East and Africa are also expected to show continued solid demand, and current low inventories should underpin the demand for air freight. The key framework on which our outlook is based includes 160,000 block hours of flying with approximately 75% coming from our core ACMI segment. About 13% from our AMC Charter operation and about 12% from our commercial charter operations.

In ACMI, volumes will benefit from increased flying by the 747-8 aircraft. Volumes in our AMC Charter business, including our new 767 operations, should total approximately 20,000 block hours, with passenger flying likely to contribute more than half of those hours. And we see a growth trajectory in CMI flying for Boeing and DHL Express. In addition, maintenance expense is now expected to total approximately $175 million, slightly less than the $178 million we forecast previously. Aircraft fuel expense is likely to be noticeably lower in the second half of the year. That's primarily due to a reduction in US military's paid fuel price on July 1, which reflects the general decline in jet low prices this year. This decline and fuel expense for the military will have a minimal impact on our earnings, however. That's because we are reimbursed for fuel consumed in AMC charter flying at the pay grade established by the military. As a result, any reduction in AMC charter fuel expense will be largely offset in our AMC charter revenue.

While our global outlook acknowledges near-term uncertainties about the global economy, and the impact that might have on air freight demand, the investments we've made it our business should generate increasing contributions throughout the year. As a result, we expect the sequential improvement in our quarterly earnings to continue. With third-quarter earnings to be moderately higher than the second quarter, and fourth-quarter earnings to be substantially higher than the third quarter. This is a good point to ask Spencer to provide you with some additional perspective on our second-quarter results and their outlook. Following Spencer, I will provide some additional thoughts, and then we will be happy to take your questions. Spencer?

Thank you, Bill and hello, everyone.

As slide 7 illustrates, our second-quarter earnings compared favorably with our earnings in the second quarter of 2011. We delivered adjusted net income of more than $31 million or $1.18 per diluted share in the second quarter, on operating revenue of $425 million. Earnings growth in the second quarter was primarily driven by the addition of profitable 747-8s in our core, long-term ACMI business, as well as our new military passenger service, which we began flying in May 2011. Looking at slide 8, you see that operating revenues in the second quarter of 2012 benefited from increases in block hour volumes in our military charter passenger business, which generated $63 million of revenue growth, and our commercial charter operations. Overall, revenues were 21% higher than the second quarter of 2011. Revenues in our ACMI business, including CMI, were unchanged compared with the second quarter of 2011, as block hour rates increased while volumes declined. ACMI rates increased primarily due to the impact of higher rates for our Dash 8s, offset by growth by our lower rate, but highly profitable CMI business.

The change in ACMI volumes was primarily driven by timing differences related to the redeployment of 2 747-400 freighters that provided support to our commercial charter operations during their remarketing periods. One of these aircraft was redeployed to Etihad in June, and the other began flying for DHL in July. The decrease in ACMI flying during the quarter was partially offset by the start of CMI flying for 3 767 cargo aircraft for DHL. On average, our ACMI customers flew 4.1% above contractual minimum block hours during the second quarter. We operate an average of 15.1 747-400 and 3.3 747-8 freighters in AMCI during the quarter. With our CMI operations adding an average of 3.5 aircraft to the segment, one Dreamlifter, 1 passenger 747-400 and 1.5 767-200 freighters.

In AMC charter, revenues during the quarter grew 23%, driven by our passenger service, as well as higher rates paid on 747-400 cargo aircraft utilized during the quarter. We flew 3,389 military passenger block hours during the second quarter. And we expect to achieve over 10,000 hours for the year, as we combine additional 767 passenger flying with our 747-400 passenger operations. Commercial charter revenues in the first quarter reflected a 79% increase in block hour volumes, partially offset by a modest decline in average block hour rates. Higher volumes were driven by our deployment of an additional 747-400 freighter to support increased demand in South America, as well as the temporary redeployment of 2 747-400 freighters from ACMI, before they were placed with Etihad and DHL Express. In addition, we increased the utilization of our passenger aircraft by taking advantage of opportunities in the commercial charter market. Commercial charter revenue per block hour reflected the impact of lower fuel costs and lower yields on the increased commercial charter capacity during the second quarter.

Moving to slide 9, segment contribution totaled $82 million in the second quarter, compared with $68 million in the second quarter of last year. Earnings in 2012 were positively affected by revenue and volume growth in our AMC charter passenger business, as well as lower heavy maintenance expense on 747-400s versus 200s. Revenue and volume growth in commercial charter, and higher average block hour rates at ACMI, complemented by lower maintenance expense for our new 747-8s. Results in each segment were partially offset by increased crew costs and other volume-driven operating expenses, compared with the second quarter of 2011. In addition, AMC charter and commercial charter incurred higher aircraft ownership costs related to the deployment of 747-400 aircraft into these segments in place of 747-200s.

Slide 10 summarizes the updated quarterly detail about our 2012 minutes expense outlook, which Bill highlighted earlier, and I touched on a moment ago. Maintenance expense of $43 million in the second quarter was about $5 million less than what we forecast for the quarter during our last call. Half of that difference was due to lesser heavy maintenance expense, while the balance was roughly split between non-heavy maintenance and line maintenance. As we have noted in the past, the timing of maintenance events is subject to change as these events are conditions-based. While the number of scheduled heavy maintenance events during the quarter was in line with what we anticipated, timing differences with respect to unscheduled engine maintenance resulted in reduced heavy maintenance expense, relative to our prior forecast. Non-heavy maintenance during the quarter benefited from a lower-than-expected average cost for the overhaul of auxiliary power units. For the year, we expect to incur about $175 million in maintenance expense, $96 million in the first and second quarters, with approximately $43 million in the third and approximately $36 million in the fourth quarter.

Turning to slide 11 and our balance sheet. You can see that the 2012 is expected to be a year in which the business investments we have made will help to grow our cash balance and lower our net leverage ratio. We ended the second quarter of 2012 with cash, cash equivalents and short-term investments totaling $244 million, compared with $195 million at year-end 2011. The change was driven by net cash of $86 million provided by operating activities, and by net cash of $135 million provided by finance activities, partially offset by net cash of $175 million used for investing activities. Net cash from investing activities primarily related to the purchase of our fourth 747-8 freighter, as well as the purchase of a third 767-300 ER passenger aircraft for our AMC charter and commercial charter operations. Net cash provided by financing activities primarily reflected proceeds from the issuance of debt, in connection with our fourth 747-8, which were partially offset by payments on debt obligations and debt issuance costs. Both the proceeds from our issuance of debt and the payments we made on our debt obligations reflect the refinancing in June of a $142 million floating-rate term loan, under a facility guaranteed by the Ex-Im Bank.

The refinancing enabled us to establish a fixed coupon rate of 2.02% on 12-year secured bonds that are also guaranteed by Ex-Im bank. And just the other day, through a similar refinancing, we achieved a fixed coupon rate of 1.73% on Ex-Im guaranteed bonds in connection with the delivery of our fifth 747-8 aircraft. Excluding the acquisition of aircraft, engines and related capitalized interest, core capital expenditures totaled $18 million in the first half of this year and are forecasted to total about $49 million for the full year. We expect our cash balance to grow throughout the year and lower our net leverage ratio, which includes capitalized rents, to about 4.3 times annual EBITDAR at year-end from 4.8 times at the end of June. Including the benefit of an investment in our outstanding enhanced equipment trust certificates or WTC debt, our net leverage ratio would be further reduced to 4 times at the end of 2012.

Moving on to slide 12, we gained some perspective to the ability of the Company to generate free cash flow and grow our cash balance. As you can see in the left side of the slide, we expect the operating cash flows from our Dash 8s, the favorable bonus tax depreciation benefits that they generate, and the positive cash back that we have received and will receive in future deliveries will enable us to continue to grow our cash balance. Due to the benefits of the bonus tax depreciation, we don't anticipate any US federal income tax until 2016 or after. Later this year, we also expect to receive an income tax refund of more than $24 million related to 2010. On the right side of the slide, you see our outlook for free cash flow. All of the business efforts that we've been talking about should generate significant free cash flow per share this year, and into the future.

With that, I would like to turn it back to Bill for a few concluding remarks on slide 13.

Thank you, Spencer.

We have built a strong and resilient business model, and we expect significant earnings growth in 2012. Our reported and adjusted fully diluted EPS should exceed $5.10 this year. As we have noted, this is an increase of approximately 24% from adjusted EPS in 2011 on a 17% increase in block hours, demonstrating our operating leverage. Our view is tempered by difficult global economy and the effects it may have on air freight demand. However, our 747-8s and 747-400s will drive volumes and profitability in our core ACMI business during the year. And our growing passenger military business, CMI operations and 767 platform will complement the growth. Our modern and efficient fleet, our diversified business mix and operating flexibility, our ability to generate free cash flow, and our strong solid balance sheet, provide a competitive advantage that is unmatched in our business. And with the investments we've made to grow our business, we are positioned to perform well in all economic conditions, and to deliver the exciting growth we see ahead.

With that, operator, may we have the first question please?

(Operator Instructions)

Our first question comes from the line Jason Ursaner with CJS Securities.

Congratulations on a very good quarter. You guys both mentioned going to market with the Ex-Im guaranteed bonds on the first two Dash 8s under the credit facility. As we think about future interest expense, how does the coupon rate compare with the all-in rate when you include fees at Ex-Im from the 2011 ASU?

Jason, I'll say a few things on that. When we take a look at Ex-Im overall, these two transactions start as a loan, they are a floating rate loan. We then entered into bond transactions through the capital markets and fixed those rates. And to step back just a little bit, for others, perhaps, Ex-Im has provided Atlas with these loan guarantees because they took a thorough look at our business model, at our operations, at our credit worthiness.

And so, they felt for six of our aircraft, we have a financing facility in place for six of our aircraft, that will be backed by the US Government. So, just with that backdrop, we took out, for our first aircraft, we took out a loan with along with Apple Bank For Savings. Similarly, we had a floating-rate land with Apple Bank For Savings for our second aircraft delivery, and both of those were converted through the capital markets into a fixed-rate financing. As we said, one at 2.02%, and one 1.073%.

So, to answer your question, if we continue to finance the aircraft through Ex-Im, we expect in the current environment to see coupon rates similar to those, but, of course that depends on what's happening in the interest-rate environment overall. As Ex-Im, as we move forward and the deliveries extend, then the ASU or sector understanding that Ex-Im utilizes would increase the all-in rate a bit above where it is today, but certainly still was much, much lower than we could achieve elsewhere.

The first three aircraft that we financed had a blended rate of about 6.3%. The last two aircraft had a blended coupon rate of 1.88%. So, with these, of course, when you include the fees, the rates certainly go higher, but still less than we can accomplish with the banking community.

Right. The rates are phenomenal, which is kind of getting into my second question. When you placed the original order back in 2006, I think you made the investment case based on rates in the high single digit range. So, just given the customer block hours, rates that you negotiated so far, the rates on interest you now achieved and the higher leverage ratio you are able to utilize, how do you expect returns now compare with what they were when you originally went into the order back in 2006?

The financing is certainly lower than we had originally modeled. We had originally modeled financing around 8%, and so, as I said, the financing has come in much better than that, which is filling up the profitability of our Dash 8s, and it's helped the returns on the Dash 8s. There is no doubt about that. As we talk about the profitability with Dash 8s, we've included what we expect for financing in our guidance and in our expectations, and that will continue to be the case.

Okay, great. I'll jump back in the queue. Thanks.

The next question comes from the line of John Barnes with RBC.

As I looked at the quarter, what kind of struck me was, this wasn't necessarily kind of a normal Atlas quarter. We got a lot more contribution for military and a lot more contribution than we were expecting in commercial charter. And not that that's a bad thing, given where the fleet was kind of morphing, but I am kind of curious, if I think about Q2 being a little bit of an anomaly versus what I would normally expect to be generated by the various business units, do we see more of a reversion to the norm in 3Q, now that you've got the couple extra aircraft moved back into ACMI service? Am I thinking about that correctly?

So, as we said, John, consistently, I think, 75% of our business comes from core ACMI and CMI and that absolutely is the case, and that is how we see our Business going forward. I think you struck on a couple of points that are important to think about Atlas. We do have flexibility in our model and we manage our Business aggressively.

And where there are opportunities to move in commercial charter versus ACMI, we will do that and we've done that in the past as we've talked about. And I think we clearly distinguishes us from (inaudible) for example we were able to take aircraft where there was a short transition period from one customer to the next, one ACMI customer to the next, and make good use make good use of them and generate good returns for them in the commercial charter market.

Military has undergone a transformation. Last year we delivered 18,000 cargo hours for military, and this year is looking at something less than 10,000, so that's a 45% decline. What we've been working on for several years, and what we demonstrated we can deliver is we go into that military passenger business $69 million, $63 million of revenue growth versus last year, we have a strong position in that business now and, as I noted in my comment, post-conflict, military still have strong passenger demand.

95% of the troops move on commercial charter. Right now forecasts call for 138,000 or so troops to be deployed in the Pacific, 20,000 to 30,000 troops in CENTCOM, 30,000 plus troops in Europe. So, there's a lot of requirement for rotation, for training, training within domestic, so I think it shows the strength of the modeling and it shows what we are able to achieve. So, going forward, we said 160,000 block hours for this year, 75% of those ACMI, 25% is the blend of commercial charter and passenger, so our military with the emphasis on passenger, and that's what the Company will look like, to get to the first part of your question.

And then, I looked at the commercial charter results, I mean obviously, the block hours were influenced by the fact you had a couple more aircraft in there. But still nonetheless was a pretty solid result, especially surprised at how strong the increase in revenue per block hour was in that market. Are you suggesting that enough capacity has come out of the industry that we should see -- that any time there's going to be some surge in volume, we should be able to see you take advantage of that on the commercial charter side? That the market is robust enough for those that can play in it, because capacity has come out of that market?

So, a couple of things have happened, as I think we referred to in our comments. A number of the carriers with large freighter fleets reduced frequencies. I don't think we saw necessarily parking, which would suggest a more permanent status./ But some reduced frequencies, that certainly stabilized yield. There certainly were some new product launches, and higher-volume shipments from known manufacturers like HP and Apple and Samsung and others, Dell and others who we all know.

In my remarks, we said we were looking forward to new product launches the remaining four months of the year, and I think a carrier or an operator, in our case we are kind of both because we are the ACMI provider to our carrier customers who can pivot and respond to market change, and have our own charter market. Those that are in position should be able to take advantage of a spike in demand or a peak season, as one develops in the fourth quarter this year and continuing on to 2013 and beyond.

John, this is Spencer. I would add. Overall, we added about 2,500 incremental block hours in commercial charter. We added the additional plane in South America, the benefit of having a global business taking advantage of where our business is strong. We added an aircraft to take advantage of the strong South America market. And so, we did that.

And of course as you said, we added the two aircraft during their short remarketing period, and that replaced some of the 200 that we had in that segment. But, I do want to temper that, just remember back to the first quarter where we saw that the profitability from commercial charter was nearly as strong, so I just want to temper that a little bit.

Okay. Thanks for your time. Nice quarter.

Our next question comes from the line of Alex Brand with SunTrust.

Your guidance obviously reflects some conservatism, I am assuming with respect to peak primarily. I was wondering if you could just talk about, are you at that point yet where you are having some discussions about charter capacity needs, and what your usual peak customers might want to do there? And is that giving you some kind of read on peak?

Thank you, Alex. The way I think about our guidance we guided to in excess of $5.10, and as we pointed, out that's a 24% increase over our adjusted EPS of 2011. I think if we just step back and kind of look around us, and consider what we've heard from other companies in international freight transportation overall, the concerns that still exist in Europe and even the comments coming out from Deragi today on uncertainty in the Middle East we think the 24% year-over-year growth in earnings is a pretty strong outcome given the level of uncertainty.

That said, we think there will be a peak, I can't really comment as to the magnitude of that peak, how strong that peak will be, but our view on peak there aren't these new product introductions that are coming out. They are not explicit this point, they are certainly being talked about between manufacturers and freight forwarders and their supply chain providers, and those discussions -- those parties are having discussions with our ACMI customers and with us through our Commercial Charter business. So, the guidance that we have given shows good earnings growth, sequential quarter growth, and suggests a peak, but the magnitude not yet certain at this point, Alex.

Okay, fair enough. With respect to the contribution margin of military in the quarter, I guess I thought as passenger ramped up and becomes more than half of your military, that the margin would go down? Am I thinking about that right, or is there something that sort of help boost that margin in the second quarter?

Yes, Alex, that generally is correct, but one of the big differences is that you saw this quarter was that we retired the 200s, and so comparing this year versus last year we put in -- we were flying more 747-400s and there's a premium rate that's earned on those, so there's an impact to that, as well.

Okay. Thanks for the time.

Your next question from the line of Jack Atkins, with Stephens.

So, my first question, to go back to the guidance issued for moment, when we think about your commentary for the third quarter versus the second quarter, I think you said up, up moderately sequentially. Typically, you see about a 15% to 20% sequential improvement there, from quarter to quarter. Is that which you mean by moderate? I just want try to frame that up so everyone can be on the same page, as far as the third quarter?

Jack, it's Spencer. I don't think we are going to define that anymore for you. We are comfortable with the way we described it. As Bill said, the key thing, the really important thing here is that 24% growth over the prior year with 17% block hour growth, it's a really terrific year for the Company. We think our earnings will be at or above $5.10 for the year. We do think the third quarter will have moderate growth over the second quarter with much more significant growth in the fourth quarter. I don't think we can provide too much more than that.

Okay, I understand. I understand. And when we think about the ACMI segment, the legacy 400s there, that are up for renewal this year, could you maybe give us an update on how many of those you have left to sort of renew with existing customers or maybe place with new customers? And then also they could give us an update on the placement of the additional two Dash 8s that you plan to take later this year. Just curious where you are in the process of putting those under contract?

Yes, two things we said, because there has been a lot of discussion about the 400 placements and the Dash 8 placement and how should you think about that. And we talked I think at some length about this on the last quarter's call. So, what we said is do we have 20 freighter aircraft in ACMI today, and that is our 5 747-8s and 15 747-400s, and what we said by the end of the year we will have 23 aircraft in ACMI. And so that's the two additional 747-8s for a total seven, and one additional 747-400 for a total of 16, and that's how we've talked about the ACMI and felt that's probably a better way to think about the aircraft placements by equipment type in ACMI.

You asked about the two remaining deliveries, aircraft six and seven, they will be in service before the end of the year, and they will be in ACMI operations, and we are continuing to finalize those with our customers. And then, overall we have continued CMI growth just to point to that for a moment. Boeing continues to ramp up the 787 production that drives our Dreamlifter flying. We've taken the fourth CMI 767 from DHL and we will have the fifth CMI 767 from DHL beginning to operate in October.

Okay, great. Thank you.

Your next question comes from the line of Kevin Sterling, with BB&T Capital Markets.

Congratulations on a nice quarter in a challenging environment. Bill, I am going to ask this a little bit different way than Jack asked it, but I think one of the fears out there is this fear of placement risk, as you took delivery of the Dash 8 how you can deploy the 400s that the Dash 8s are replacing. It look like this quarter you temporally put the 400s in charter to stir up some strong demand in South America before signing up a new ACMI customer. So, is this a game plan or road map to address placement of the 400s as the Dash 8s come on line?

I will just go back to the prior statement. We manage our fleet aggressively. We have a long track record now of managing the asset, placing them in ACMI, taking some opportunistic play in the commercial charter market, we certainly did that in the second half of 2009, 2010. But, as we talked about even in our investor day back in June, our core business is ACMI. We invest to buy aircraft for ACMI and 75% of our block hours, 75% of our revenue-generating activity will continue to be in ACMI.

As we move one aircraft type, exchange aircraft types with current customers, as we bring our new customers, there can be some period of time where you are coming off of one and going into the other. Here we have several weeks. We took advantage of the strong commercial charter market, but should note that we did bring Etihad on as a new customer with the 747-400 freighter and DHL, as they grow, and you might've seen their earnings release and kind of growth forecast, DP DHL early this morning, we placed a ninth 400 into their network.

So, as we said previously, we believe in 747-8 and the utility it will provide the 747-8 customer, but the 747 factory freighter, nose door, strong cargo loading capability, additional carrying capability versus the BCF has a very good market, and we will continue to place those aircraft, as well.

Great. Thank you, Bill. And, Bill, just given all of the uncertain macro factors, how important is it you partner with a quality partner like DHL Express? DHL Express was out with some strong numbers this morning, talked record shipments per day for them. You highlighted some of the strong, major tech product launches later this fall, and if I'm not mistaken, DHL was a beneficiary to some of those tech launches in March of this year, and I imagine they will be a beneficiary this go round, as well. So am I thinking about your strategic partnership with DHL the right way? How important is for you to partner with someone like them?

You are. I mean at the risk of sounding -- well it's not the risk -- getting back to basics, we can't grow if our customers aren't growing. If you look at our customers, certainly DHL Express is our largest customer, the partnership has grown from the initial six aircraft that we have in service, began service with DHL in 2008, now we have the nine freighters, we are into five CMI operations, I think there could be certainly more growth with DHL as the company continues to grow.

But our other customers are growth leaders and leaders in their markets as well, and so we have Qantas, and we have British Airways, and we have Emirates and we have Etihad, and we have Panalpina. And on the commercial charter side, if you recall from our investor day, we talked about some of the key brokers with whom we work like Chapman Freeborn and Rocket, among others, just to name a few. And that strength of our customer book, if we wanted to think of it in those terms, benefits us in several ways. Certain benefits us in revenue and earnings growth and just long-term growth prospects overall.

But when Spencer and Ed McGarvey, our Treasurer, go to the market for financing on the first tranche for the first 747-8, or the second large tranche, large tranche on Ex-Im, clearly, the lenders are not only looking at Atlas and our creditworthiness, and certainly looking at the attractiveness of aircraft, the 747-8 in this case, but they are looking through that to see and look at our customers and think about the strength in our customer book.

So when the lender makes the lending decision, they are looking all of those, and factoring those into the ultimate loans we come out with, just to cite another benefit of a really strong customer book that I believe we've built over so many years.

Absolutely, I agree, I think that book of business has proven resilient in such challenging times. Thanks again for your time, I really appreciate it.

Your next question comes from the line of [John Golding] with Morgan Stanley.

I just wanted to ask a couple on guidance. When you initially issued your $5.10 in the beginning of the year, I think you also said that 30% of the full year would be generated in the first half. That math now points to a number that's higher than your guidance, so can you just talk a little bit about how the year evolved compared to where your head was at back then? Should we think of this as the first half surprised versus what you were initially thinking, or now the back half is somehow more uncertain maybe what you thought, with less visibility earlier in the year?

Well, I think all of us entered 2012, when I say all of us, I mean all of us in international freight transportation in particular, with some level of concern about the macro environment. There was no peak in 2011. The air freight market had been declining month over month starting in February of 2011 and continued into the first quarter, and to some extent continues today, in terms of air freight demand, with certainly some air freight capacity coming back in the terms of the freighters and belly capacity, all overshadowed by what was going on and continues to go on in the euro zone, and whether it is Greece or Italy or one or another country, and one of the impacts of Arab Spring and what will that do to feel prices up and down et cetera.

A lot of unknowns, I don't know if it's different than any other year, but certainly a year with a fair amount of uncertainty. So, our $5.10 was driven by our best assessment of our ACMI segment, our military segment, and our commercial charter segment and so, overall, we're on track, we guided to a 24% year-over-year earnings growth, that's essentially what we've seen here in the second quarter.

We have provided some texture, but not specifically quarterly guidance going forward. And I think with all those unknowns, I don't think we are surprised, I think the timing might be slightly different than we might have expected, but it feels like we are right along the path that we charted with the 24% growth and earnings in excess of $5.10.

John, it's Spencer. I'll just add to that. Where we provided the guidance, if you look at the actuals now, it's pretty close. We are at about 32%, 33%, if you use $5.10 as the baseline, and so we are at about that much which leaves 67%, 68% for the rest of the year, so that's pretty consistent with what we've been saying all along as Bill just said.

Sounds like you are on track. If I could just follow up on your comments about the product launches in the back half of the year. It seemed, when iPad launch was going on, that we had a lot of visibility into that, but even then it sort of surprised to the upside. If we fast-forward a few months and we're seeing a lot of excitement in the news about different product launches, signs of a spike in air cargo demand, should we interpret that general scenario as incorporated in your guidance, or upside to your guidance? I just don't know what is in the number?

Well, we've been talking about a stronger second half and certainty market recovery in the second half for several quarters now. In fact, I think, when we provided guidance, when we announced fourth-quarter 2011 results, we said that our guidance was predicated on a flat first-half, flattish first half and some recovery in the second half of 2012, and I think that was fairly consistent with other market observers and other companies as they reported, as well.

And so, what we have talked about today is an improvement in the second half. We have talked about -- you asked us to clarify the numbers, and Spencer did, 67% to 60% of those earnings occurring in the second half. And we been talking about second half product launches for several quarters now, as have other players in international air freight and express. So, it is generally incorporated in our guidance to get back to your specific question.

That's really helpful color, thanks a lot.

The next question comes from the line of Ray Neidl with Maxim Group.

Just as a general type of question, your table is very helpful regarding maintenance expense, and I know it's difficult looking out longer-term. Regarding maintenance, it seems like your fleet is been modernized with the new aircraft acquisitions you are making and the selling of some of the older aircraft, but that's going to be partially offset by growth in your fleet and your business. But in general terms going forward over the next couple of years, for modeling purposes, can we expect to see a general trend of maintenance expenses going down on a net-net basis?

Ray, it's Spencer. Maintenance expenses, there are a few key pieces of them. So there's heavy maintenance which depend on events, and so that depends when aircraft are due for C and D checks, which depends on how much flying the aircraft have been doing. There are engine overhauls which depend, how many cycles the engines have operated. So that simply depends on volume and timing them when their last overall and heavy check was.

There's line maintenance that goes, based upon block hours, so as we fly more hours, line maintenance will increase accordingly, it's a variable expense. And there's other maintenance, not heavy maintenance for things like auxiliary power units and thrust reversers and so forth, and again, that's event-driven and depends upon when they our due for the next check. Of course, these are really big, really expensive assets, and things happen sometimes.

And so we do our best in trying to predict our maintenance expense and we are providing it to you, I'm glad you like the slide. We are providing it to you now every quarter, we update it every quarter. We are trying to give you that granularity so that you can try to estimate that in your model. I think it's fair to say that line maintenance, you should expect to see growing over time as block hours increase, the other two really depend on events. We try as much as we can to maximize the yield on maintenance events, so we get the longest amount of flying time from them, but also trying not to have aircraft out during the most important times the year for us.

Okay, great. Another very general type of question. I've been listening to some of the aircraft leasing companies' presentations this morning, and this regards the Air Freight business. They are seeing a lot of weakness out there right now. Stable, they think it's bottomed out, but it's is very weak going forward. And I guess a lot depends on Europe and the world economy over the next few quarters. But to me, looking at this, when and if we do have a recovery, whenever that comes, it looks to me like there's a lot of really lot of upside potential for your basic businesses. Would you agree with that premise?

Yes, I would agree with that premise, Ray, and we demonstrated that well when the market snapped back some 20% in the second half of 2009 into 2010. We've got the 747-8, and we have two more that deliver. The next clearly most competitive asset is 747-400 for long-haul intercontinental flying, particularly when you look at it on an operating costs per ton mile for ACMI customers and we have a good fleet of those.

And back to the comments that were made earlier, we have customers that are leaders in the air freight and express market who are poised to take good advantage of that demand, which would drive our core business ACMI, which would drive above minimum flying, certainly very good placements and on a Commercial Charter business, we have some capacity there that we opportunistically will deploy and take advantage of those markets as they develop.

Okay, great. Thank you.

Your next question comes from the line of Scott Group with Wolfe Trahan.

I just want to make sure I'm understanding exactly what is going on with the ACMI fleet and the guidance that you gave. So, the most recent Dash 8 that came in for Panalpina, where is that 400? Is that in charter temporarily, but the plan is to eventually put it into ACMI? Is that right?

So, Scott I'll just repeat what I said earlier. We will have 16 747-400 factory freighters in ACMI at the end of the year, and we will have seven, 747-8F freighters in ACMI at the end of the year, for a total of 23. And then the two 747-8s that deliver in 2013 will also be in ACMI.

The balance of our 400 fleet, which is a combination of 400s and several BCFs will be in commercial charter and military, as well as provide maintenance cover. And then the toggle above the 23, 25 number that I just talked about will depend on the ACMI opportunity set and the commercial charter set. It's hard to follow, your question was to follow one tail tail-to-tail, and that's why we think it's probably better to think is more useful for us to think about it in the terms of total fleet placement by market segment.

I guess the reason I was asking, it is more to try to get a sense on third quarter, because I'm not sure where that plane is, because we were so far off on commercial charter revenue in the second quarter, and it would be helpful to know if that plane is in ACMI right now or charter right now, so we can get a sense on how to model it at least for the third quarter. (multiple speakers).

The way to think about it we are at 15 400s in ACMI now, and we will have 16 at the end of the year, so if that's helpful in terms of how you think about the aircraft placement there. Maybe that's helpful, then we have the five currently the five 747-8s which will become seven by the end of the year.

And, you are at 15 now, that's for third quarter?

Yes. Because that includes the placement with DHL that we talked about in July.

Okay. Okay. That makes some sense. And then, I want to understand, so you talked in the past about $0.03 to $0.04 per plane per month on the Dash 8, and because the financing is coming in so much lower than you thought, is the accretion on that plane a lot better than you initially thought, or if there's some offsets there? And then along with that, when you think about the 400s, so, I think we see this quarter, the benefit from a 400 in military seems a lot better than a 200 in military, so that's helping. How do we think about a 400 in charter versus a 400 in ACMI? And the profitability there? So, I guess that's a couple of questions but --

Scott, it's Spencer, I will try to tackle both of those. So, on the profitability of the Dash 8s, we do get this question from time to time, and we had anticipated for a long time, we have been working with the Ex-Im Bank for a very, very long time, and so we had anticipated low financing.

When we originally, as Jason asked earlier, when we originally purchased the Dash 8s, we thought that we would have a much higher rate, and that was back many, many, years ago. But more recently, over the past few years, we have been working with Ex-Im. We anticipate having pretty low Ex-Im financing, perhaps not exactly as low as it is at the moment, but we anticipated having low Ex-Im financing. So all of that was built in. There are a lot of things that go into an estimate like that. And the financing certainly is one of those costs that was built in. So, it is one of the many factors that were built into that.

As far as your second question, as far as profitability, when you compare ACMI to commercial charter, the quick answer, which is not the one you wanted, it depends. And so, it depends on what's happening in the commercial charter market generally, or it depends on the rate that we have with our ACMI customer. But overall, profitability is usually a bit higher in commercial charter, but that's offset by the long-term surety, a long-term ACMI contract, which is on a fixed take or pay basis that has monthly guaranteed minimums.

So, to be able to take that risk off the table I prefer ACMI any time, compared to commercial charter. We don't buy aircraft to put into commercial charter. We buy aircraft to put in our long-term ACMI business, and to the extent that we have aircraft that are available for commercial charter, then we take advantage of that opportunity.

Okay. That makes sense. Thanks a lot. Appreciate it.

Your next question comes from the line of David Campbell with Thompson Davis and Company.

I am a little bit -- my impression of the world's cargo market is not so much focus on Asia Pacific export growth to Europe and the United States, what seems to be, in my opinion needs to be the focus of most investors these days. But I'm looking at growth in other markets, and I'm just looking for some confirmation from you. For example, there's a lot of growth expected in the last half of this year, particularly the fourth quarter from your Asia exports to Iraq. I read that there are some huge new construction and oil and gas projects undergoing in Iraq.

And I wondered if that was any part of your plans, or whether you thought your ACMI or commercial charters would benefit from that? And related to that is the second quarter. We had a lot of growth in the market from Europe to Asia. And exports from Europe to Asia. Is that something you saw, as well? Thanks.

David, I think you hit on an important point and we talked about some of this in our comments here, in our opening comments. Our business is global, and we serve all global trade lanes and I think that's a strength of Atlas Air that's worth talking about. And often a lot of our discussion centers on the Trans-Pacific trade lane, which is obviously a very important one, but not the only one.

We do see very strong growth from Asia into the Middle East and into Africa. Northbound shipments out of Africa which come back to Middle East, because it's a large part of the food chain will continue on north into Europe, for example, and we are participating in our growth. Directly with ACMI through our ACMI operations for Emirates, Etihad, charter services that we provide, including charter services that we provide to our other ACMI customers, who want to participate in those key trade lanes. And I also reference Europe, South America trade flows and Asia South America trade flows are all part of the mix of business that we serve.

I think we mentioned yesterday last year we were in proximately 95 countries, 250-ish, 240-ish airports. So, we are seeing strength. That's certainly part of the trade lanes that Etihad wants to serve and will serve with the 400 we have put in operation for them. Emirates, as well. Panalpina serves those trade lanes for example, and British Airways. So, that's all part of the world markets that we serve.

Specifically Iraq, no because the FAA does not allow entails or US registered aircraft to provide commercial operations in and out of Iraq. Flying in and out of Iraq has all been under a military, a call signs with special military permission. But in terms of just overall investment, China and other countries, China principally, into these research-rich markets, that's absolutely going on and continues to grow and it's a good part of our Business.

And what about the market from Europe to Asia, exports from Europe to Asia, did you see that grow?

Traditionally, Europe has exported more to Asia than the US has exported to Asia. Utilizations have traditionally been higher, Europe to Asia, then US to Asia have been in those, and those continue. And certainly a lower euro has helped Germany and other European countries ultimately sell more and export more to Asia over the last several months and we are seeing that.

Thank you.

Your next question comes from the line of John Mims, with FBR Capital Markets.

One quick one from me. When -- on the commercial charter, fuel gallons per block hour was down almost 13%, and I know some of that is because of the 400s replacing the 200s, but is that the only real mover there? Is there any kind of trade-lane specific, shipment weight specific, that's driving fuel efficiency up?

John, if you're looking at year over year, we had 747-200s that were flying in commercial charter a year ago, versus this year 400s. So there is a big improvement in fuel burn, and it was because of the more modern and efficient aircraft.

Right. No. I get that, but (multiple speakers) even sequentially it went from 35 to 30 200s. So I'm just curious if that 3200 to 3300 fuel gallons per block hour is a good number we should carry forward?

3200 gallons per block hours for a 747-400 freighter is a good number. We still have some 200s flying in the first quarter. We didn't fully retire that fleet. There's no real appreciable difference in stage length, so we're not flying shorter lengths and consequently incurring more cycles, and there's not a real difference between trade lengths served and commodity -- commodity weights.

John, the difference between fuel burn on a 747-200 versus a 400 is approximately 600 gallons. So, I think you have that right.

Okay. That's helpful. All right. I appreciate the time. Thanks a lot.

Your next question comes from the line of Kevin Sterling with BB&T Capital Markets.

Gentlemen, thanks for letting me ask a quick follow-up question. Bill and Spencer, a couple weeks ago you guys announced, signed a new Department of Defense contract. Can you walk us through the mechanics of this new agreement? I believe it is different than the typical craft agreement, where you're in the pool with FedEx. Can you talk a little bit about this new DOD contract?

The contract is titled Theater Express, and Theater Express is about potentially express shipments, and it is for less than full planeload shipments, which not really our core business. But, where we are in the contract, we are the lead, and we essentially will derive agency fees from the other participants in the service, who include freight forwarder and a broker and heavy lift operators.

We will have some flying in this, Kevin, but not principally, because again it's not full planeload, and we are not in the partial shipment or scheduled service business. So our revenue stream here is fundamentally commission, we're still calibrating what that might mean, but we think, bottom line, it's worth several million dollars to our bottom line. I know there's large numbers about what the total authorized congressional spend is over four years, and so as we come into our next earnings call, or the reporting on the fourth quarter, we will be able to provide you another -- a better handle on what that might mean, but it's in our expectations, it's worth several million of dollars a year in terms of net agency commissions.

Okay, so just to sum up, it's another revenue stream without committing capacity. Is that the right way to think about it?

Yes. And, you may recall that we do represent Volga-Dnepr. We've been Volga-Dnepr's agent. They provide the actual heavy lift to the military, and we are their US carrier, US flight agent. So it's just continuing to build on these agency relationships that we have.

Okay, and thanks for taking my follow-up, I really appreciate it.

Your last question comes from the line of Jason Ursaner with CJS Securities.

I'm going to echo Kevin's words, I realize the call is getting exceedingly long, so thank you for the follow-up. I just want to follow-up on Kevin's earlier question, actually, about what's in a number, what could be a potential source of upside with regards to the new product introductions you talked about in the second half?

I'm not looking for your comment on any specific product or customer, but as the incumbent, so to speak, when you look back at the March period, when there were also some of very important product launches, do you think that these launches highlighted the strength of your Business and your global logistics capabilities, and was there anything you could point to about what you delivered to customers during the period that wouldn't have that expectations?

So, back earlier we had a discussion about the earnings overall for the year, and how that might break out, and we had a discussion about first-half second-half, and Spencer pointed out 32%-ish in the first half and 67%, 68% in the second half, and that's pretty consistent. We participated certainly in new product launches in the first half of this year, and expect to, in the second half.

First of all, it goes right to the customer, and the customer conversations we've had with DHL Express coupled, with their DGF, the Flooring business and supply chain are big participants in that, and we are the ACMI provider. But they rely on, I mean our whole contract with DHL is predicated on very high service levels of on-time performance that we provide, so where we are strong is in those service operations. Whether it's for DHL, or for Qantas or for Panalpina, and on and on. And you think about who are the supply-chain providers.

The other thing that we were able to do in the first half, and we will expect and will continue to do the second half, is that we've mention on other calls, Jason, that we are authorized to operate in and out of 18 cities in China. And, among those18 cities are the interior cities where so much of the manufacturing has relocated to. Like Chungqing or Wuhan for example, and we did fly out of Chungqing last year, and carried a product out of Chungqing into the US and to European markets.

So, in terms of the service network, the authorizations that we have, the quality of service that we provide, and the mix of customers who all participate in one form or another in those markets were very well-positioned. That's the ACMI side of our Business. In our Commercial Charter business, there are other customers who are not ACMI customers but are charter customers do have very good supply chain and third-party logistics capabilities and do charter aircraft from us. They too participate in, and they rely on that and expect the same level of service reliability that we are able to provide.

Okay. And on the reallocation of the fleet, the 23 aircraft by year-end excluding aircraft equivalents you mentioned two Dash 8's you need to place and one 400. Should we therefore assume you are marketing the next round to new customers after giving the first five to existing ones, giving them a first look? And how late in the year could it go before we as outsiders should begin to get nervous? If we don't hear an announcement on placement?

Well a couple of things. We could -- it's a mix. There may be current customers that want to increase their fleet, and that would be a net new, because it would be just a simple absolute increase. That's why we were specific to 16 and 7 placed with our customers, 400s and the Dash 8s. That's in our guidance, and I've said that several times now, so we believe the aircraft will be placed, and it all kind of rolls up to, I think, the broader things that we discussed so many times.

Our model works, we are reaffirming our guidance in the face of what I think most of us would agree is very challenging macroeconomic environment, and as Spencer pointed out in one of his slides, we are generating very strong cash flows, a very strong balance sheet, and those continue to grow.

And in terms of how late in your Google before we should expect an announcement? I mean, if you are going to get them in Q4, the end of Q4? The next two?

Yes. So, as we complete the negotiations with our customers, Jason, will announce them. We've got 68% of the earnings in the second half of the year. One would have to consider those placements would have to occur, and that is the guidance we provided.

Okay. Excellent. Appreciate it.

There are no further questions.

Thank you, operator, and Spencer and I would like to take all of you for your interest in Atlas Air Worldwide. We appreciate your participation and the questions that we've been able to talk to today, and we look forward to speaking with you again soon. Thank you very much.

This concludes today's conference call. You may now disconnect.